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The Frozen Frontier: Is Shell Ready For The Risks Of Arctic Drilling?

In the wake of the Deepwater Horizon disaster, several reports have found that many oil and gas companies—not just BP—were poorly managing the risks of offshore drilling. Shell is moving forward with at least two Arctic wells this year, at a time when confidence in the oil and gas industry’s risk management practices is remarkably low.

Just two years after BP’s Deepwater Horizon rig exploded in the Gulf of Mexico, another oil industry giant is poised to begin drilling in an even more forbidding, unpredictable and remote environment: the Alaskan shoreline.

Shell is moving forward with at least two Arctic wells this year, at a time when confidence in the oil and gas industry’s risk management practices is remarkably low.

In the wake of the Deepwater Horizon disaster, several reports have found that many oil and gas companies—not just BP—were poorly managing the risks of offshore drilling. As it prepares to move into the Arctic, has Shell set itself apart from its competitors, or is the company taking avoidable risks in an unforgiving environment?

A new report by Ceres shows that oil and gas companies—Shell included—are not doing enough to manage offshore drilling risks and disclose their efforts to investors. The report, Sustainable Extraction?, examines risk disclosure in SEC filings submitted in the first quarter of 2011 by 10 of the world’s largest oil and gas companies. It finds that out of 50 deepwater risk disclosure scores on key metrics including spill response procedures and drilling risk management, only four scores were good, and 29 (nearly 60 percent) were poor or no disclosure.

This striking lack of disclosure makes it nearly impossible for investors to understand how companies are managing the range of potential drilling risks. And investors are already wary.

Lloyd’s, the world’s largest insurance market, cautions that “the Arctic is a frontier unlike any other” that will “remain a complex risk environment.” In its Arctic Openingreport, Lloyd’s highlights geographic remoteness, ongoing changes to the environment as a result of climate change and extreme weather as key risk factors of offshore drilling in the Arctic.

Expanding upon this analysis, Ceres reviewed Shell’s most recent 2012 SEC filings and found that disclosure has not improved on four key Arctic drilling issues:

Remoteness: There were 95 major airport runways within a 500-mile radius of the Deepwater Horizon spill, helping emergency responders to arrive relatively quickly. At the Shell drilling sites in the Arctic, there are only 13. For the Gulf spill, there were 30 permanent Coast Guard facilities within 500 miles. At the proposed Shell site, there are none. The Arctic’s inaccessibility adds up to a major liability for Shell, yet its most recent filing contains no discussion of the operational risk from geographic isolation, mentioning only the challenges around obtaining permits, including the risks of third-party litigation against the Department of Interior and other government agencies.

Safety research and development: The Arctic climate presents significant threats to operational safety, exposing technical systems, personnel, equipment and the Arctic environment itself to potential disruption and harm. However, Ceres found that Shell, along with six other companies, provided no substantial reporting on safety R&D. In 2012 filings, Shell cursorily mentions the responsibilities of its R&D business unit but provides no detail about the portion of R&D spending used for safety, or the focus of that research.

Spill response: None of the companies examined in the Ceres report provided good disclosure on spill response. Shell’s reporting was poor, offering only brief mention of an industry consortium for developing better spill response systems. In its most recent filings, Shell states that “we conduct regular exercises to ensure [safety plans] remain effective,” but includes no information specific to its offshore spill response practices in the Arctic.

Drilling risk management: In its most recent filing, Shell discussed the board of directors’ responsibility for risk management and a “global helpline” for employees and contractors to report ethical and compliance concerns. These practices fall far short of “embedding a risk culture throughout the organization, adopting best practice standards and implementing practical risk mitigation measures…[and] transferring risks as a key part of the strategy,” all of which the Lloyd’s report recommends.

As evidenced by Shell’s alarming lack of disclosure, companies simply aren’t providing enough information about how they are managing the potentially catastrophic risks of offshore drilling. As destructive as the BP disaster was to both the company and the environment, it was far from a worst-case scenario. Until companies prove that they have a new approach to risk management, offshore drilling in the Arctic should not move forward.

It’s not worth the gamble.

Sean Pears, an associate, investor programs at Ceres, also contributed to this article.

Jim Coburn directs Ceres’ efforts to improve mandatory climate and sustainability risk disclosure by corporations. Drawing from his legal background, Jim helps to develop rules and guidance on reporting that strengthen corporate risk management practices and improve investor decisions. He most recently played an integral role in leading the initiative that resulted in the SEC’s issuance of groundbreaking climate disclosure guidance for corporations in 2010.